Drugmaker GSK chases volume over profit in Africa

LONDON Can you mix corporate do-gooding and hard-nosed business? GlaxoSmithKline (GSK.L) thinks so.

The British drugs giant is having some early success with a novel "hybrid" approach in Africa that is focused on improving drug access by cutting prices for a continent with 24 percent of the world's health problems and just 1 percent of the budget.

Its goal is to increase volumes fivefold in five years.

Rivals like Sanofi (SASY.PA) and Roche ROG.VX are also adopting "tiered" or differential pricing to open up developing world markets, but GSK has gone further by melding its business and corporate responsibility goals in a single operating unit.

GSK's two-year-old least developed countries (LDC) unit, by contrast, is explicitly charged with a dual role - to focus 50 percent on business and 50 percent on reputation across 40 countries in Africa and 10 in Asia.

"We've taken a bolder step by putting together this hybrid model, which gives us the management flexibility and the P&L (profit and loss) flexibility to do things quite quickly," unit head Duncan Learmouth said in an interview.

"We're trying to find opportunities that are lower return than the business might expect but are not simply a matter of writing a cheque with no return."

The new unit charges no more than a quarter of the UK price for GSK's patented drugs, while off-patent ones - like antibiotic Augmentin and asthma inhaler Ventolin - are typically sold at a small premium to the cheapest Indian-made generics.

Incentives are based on volume rather than sales or profits.

It is a far cry from the thinking of a decade ago when GSK, alongside other big drugmakers, was forced to climb down in a bruising battle with South Africa over AIDS drugs patents.

That public relations disaster was a major catalyst for the latest thinking and the move away from the concept of charging a set high price for drugs across the world, irrespective of income.

NOT POOR FOREVER

Learmouth's unit still has a long way to go before it starts to move the dial for GSK, which had global sales last year of 27.4 billion pounds ($42.7 billion), though it is growing fast.

Revenues are expected to total some 150 million pounds this year, double last year's level and up from 50 million in 2010. Its profit margin is around 20 percent, which is similar to the returns made by Indian generic drugmakers, although well below GSK's group operating margin of 32 percent.

"We're real optimists," Learmouth said. "Not all the least developed countries will be LDCs for ever and now is a really good time to invest to build a GSK footprint that benefits patients today and benefits our business in the longer term."

It is a step-by-step process in some of the world's toughest markets. Recently, for example, the unit won repeat business to supply medicines to the breakaway enclave of Somaliland, after an initial order, mainly for antibiotics, last year.

It also has a fast-growing business supplying childhood vaccines at low prices through the non-profit GAVI Alliance, which works with governments on mass immunisation programmes.

That has been boosted by the rollout of the pneumococcal vaccine Synflorix and future growth should come from Cervarix, to prevent cervical cancer, as well as the world's first malaria vaccine, which may reach the market in 2015.

GSK's approach has the buy-in of charities like Save the Children, the African Medical and Research Foundation (AMREF) and CARE International, which are helping it reinvest 20 percent of the unit's profits back into healthcare infrastructure.

Harsher industry critics like Medecins Sans Frontieres remain sceptical. MSF would like to see a radical overturning of patents in poor countries to create full-on generic competition, rather than concessions from makers of branded drugs.

RISKS AHEAD

For GSK, there are risks. In middle-income countries like Brazil and Russia, it has already lifted volumes of some drugs by implementing smaller price cuts - but will deeper discounts in Africa translate into bigger volume gains there?

Persuading local African distributors to accept lower profits for each unit they sell is one particular challenge.

Still, Learmouth thinks he can build a sustainable business and has high hopes for treating chronic diseases like diabetes and heart disease, using branded generics from South African partner Aspen (APNJ.J) and India's Dr Reddy's (REDY.NS).

Another worry for drug firms setting differential prices is the risk that middlemen will re-export drugs to higher-priced markets or that governments will demand matching discounts by adopting "reference pricing" pegged to prices in poor countries.

In Europe, the problem has become acute recently as steep price cuts in Greece have had a knock-on impact elsewhere.

But GSK has not seen this problem in developing markets and believes there is an acceptance that poor countries should not have to pay for drug research in the same way as rich ones do.

"It's a difficult political argument to say the U.S. or Europe should have the same prices as Tanzania," Learmouth said. ($1 = 0.6415 British pounds)

(Editing by David Cowell)

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